SME securitisation in the doldrums

Ian Rogers Debt capital markets
Treasurer Josh Frydenberg, briefing executives from Australian Precision Technologies on the government's SME funding scheme in Berwick yesterday.  (Image: Frydenberg and Twitter)
Treasurer Josh Frydenberg, briefing executives from Australian Precision Technologies on the government's SME funding scheme in Berwick yesterday. (Image: Frydenberg and Twitter)

For now, there is no timeline on the mechanics to convert the policy for a A$2 billion Securitisation Fund into action, though once Treasury and the AOFM are clear on objectives, it may not take long for the AOFM to unleash the money flow.

Parallels with the then-Labor government's initiative to support the operation of the mortgage market during the financial crisis in late 2008 suggest the AOFM could move swiftly.

In 2008, the AOFM issued its first request for proposals within three weeks of then-treasurer Wayne Swan's announcement of the scheme.

The AOFM told Banking Day yesterday it would share its plans with all counterparties via an operational notice in good time.

In the meantime, the AOFM will need to define its risk appetite in an asset class a world away from that of mortgages, and indeed an asset class that has all but vanished.

“As it stands, the public market for securitised business loans is relatively small compared with the Australian RMBS sector,” Martin Jacques, head of securitisation and covered bond strategy at Westpac wrote in an understated commentary yesterday.

A mid 2018 overview from S&P Global Ratings of the asset-backed securities sector bears this out.
That review featured CNH Industrial Capital Australia, Volkswagen Financial Services Australia, Liberty Financial, Latitude Finance Australia, Think Tank Group and the state of Victoria on a short list of issuers with ABS debt securities outstanding (only half of whom fit the bill for future AOFM SME funding).

Liberty Financial was the last business financier to sell ABS, via its Liberty Series 2018-1 SME transaction back in August. It said at the time this was “its seventh issue of securities backed by a portfolio of its innovative small-to-medium enterprises loans [and] Liberty’s 44th public term securitisation” over 20 years.

Westpac’s Jacques assumed that “public securitisation issuance will [soon] pick up.

“This could be through new originators into the market and/ or new underlying asset types such as accounts receivable.

“One key difference between the RMBS investment program initiated in 2008 and this new program is that capital markets are currently in a relatively healthy position.”

In 2008, the AOFM allocated mandates to arrange the issue of RMBS with the AOFM as a ‘cornerstone investor’, a precedent it may follow with its SME funding mandate.
Chris Dalton, chief executive of the Australian Securitisation Forum, endorsed conjecture that the AOFM will examine “warehouse” funding lines for smaller banks and non-bank lenders as worthy asset class to help mobilise SME funding.
Warehouse funding, however, is overwhelmingly the domain of the four major banks, though Bendigo and Adelaide Bank (through its “portfolio funding” arm) has become much more active in this niche over the last couple of years.

The AOFM can  look back at a history of funding more than $12 billion in mortgage securities over a program that finally wound down only in early 2018.

“Over the life of the program from October 2008 to February 2018, around $31.3 million in gains were realised through RMBS divestments totalling just under $3.5 billion,” the AOFM’s 2018 annual report relates.

“No notes were sold at a loss and the remaining circa $12 billion in taxpayer funds were repaid in full through amortisation and/or the exercise of call options by the issuers.

“The total gross return on the RMBS portfolio over the life of the program, inclusive of realised gains on divestment, was just over $2.9 billion.

“This corresponds with an internal rate of return of around 5 per cent per annum.”